Limited Liability Company (LLC) Basics

If you want your business to have the flexibility and tax advantages of a partnership while maintaining the limited-liability benefits of a corporation, consider forming a limited liability company (LLC).

Like a corporation, an LLC is a separate legal entity that limits the liability of its members. However, it has the tax benefits of a partnership. LLCs are also free of many of the legal requirements that govern corporations (including annual reports, director meetings, shareholder requirements and so on).

In addition, LLCs are a “pass through” tax entity, which means company profits and losses are passed through the business and taxed solely on the members’ individual tax returns.

Along with limited liability and the pass-through tax benefit, LLCs also offer other advantages to small business owners.

Members can hire a management group to run the LLC. This group can consist of members, nonmembers, or a combination.

Members can split profits and losses any way they wish. In corporations, dividends are usually distributed evenly according to the percentages of stock held by each stockholder.

An unlimited number of members may join a single LLC, and most states allow single-member LLCs.

An LLC may affiliate with other businesses, unlike an S corporation, where that ability is limited.

Of course, there are also disadvantages to organizing your business as an LLC. Some states impose income or franchise taxes on LLCs or require LLCs to pay annual fees to operate in that state. If your goal is to eventually take your company public, you may want to organize it as an S corporation now. S corporations offer substantial tax advantages over C corporations.

Also, keep in mind that LLCs are a relatively new type of business entity. Because LLCs have existed as legal business entities only since 1996, there is not much legal precedent available to help owners predict how legal disputes may affect their businesses. As always, consult an attorney experienced in business law before making any decision about how to organize your new business venture.